2006

​ We study how discount window policy affects the frequency of banking crises, the level of nvestment, and the scope for indeterminacy of equilibrium. Previous work has shown that providing costless liquidity through a discount window has mixed effects in terms of these criteria: it prevents episodes of high liquidity demand from causing crises, but can lead to indeterminacy of stationary equilibrium and to inefficiently low levels of nvestment. We show how offering discount-window loans at an above-market interest rate can be unambiguously beneficial. Such a policy generates a unique stationary equilibrium. Banking crises occur with positive probability in this equilibrium and the level of investment is suboptimal, but a proper combination of discount-window and monetary policies can make the welfare effects of these inefficiencies arbitrarily small. The near-optimal policies can be viewed as approximately implementing the Friedman rule.

​We characterize dominant-strategy incentive compatibility with multi-dimensional types. A deterministic social choice function is dominant-strategy incentive compatible iff it is weakly monotone (W-Mon). W-Mon is the following requirement: if changing one agent's type (while keeping the types of othe agents fixed) changes the outcome under the social choice function, then the resulting difference in utilities of the new and original outcomes evaluated at the new type of this agent must be no less than this difference in utilities evaluated at the original type of this agent.

​Consider a one step forward looking model where agents believe that the equilibrium values of the state variable are determined by a function whose domain is the current value of the state variable and whose range is the value for the subsequent period. An agent's forecast for the subsequent period uses the belief, where the function that is chosen is allowed to depend on the current realization of an extrinsic random process, and is made with knowledge of the past values of the state variable but not the current value. The paper provides (and characterizes) the conditions for the existence of sunspot equilibria for the model described.

​We show that a perfect correlated equilibrium distribution of an N- person game as defined by Dhillon and Mertens (1996) can be achieved using a finite number of copies of the strategy space as a message space.

​We address the issue of building consistent specification tests ineconometric models defined through multiple conditional moment restrictions. In this aim, we extend the two approaches developed for testing the parametric specification of a regression function to testing general conditional moment restrictions. Two classes of tests are proposed, which can be both interpreted as M-tests based on integrated conditional moment restrictions. The first class depends on nonparametric functions that are estimated by kernel smoothers. The second type of test is built as a functional of a marked empirical process. For both tests, a simulation procedure for obtaining critical values is shown to be asymptotically valid. Comparison of finite sample performances of the tests are investigated by means of several Monte-Carlo experiments.

​We examine how the possibility of a bank run affects the investment decisions made by a competitive bank. Cooper and Ross (1998) have shown that when the probability of a run is small, the bank will offer a contract that admits a bank-run equilibrium. We show that, in this case, the bank will choose to hold an amount of liquid reserves exactly equal to what withdrawal demand will be if a run does not occur; precautionary or "excess" liquidity will not be held. This result allows us to show that when the cost of liquidating investment early is high, an increase in the probability of a run will lead the bank to invest less. However, when liquidation costs are moderate, the level of investment is increasing in the probability of a run.

​In this paper we study delegated portfolio management when the manager's ability to short-sell is restricted. Contrary to previous results, we show that under moral hazard, linear performance-adjusted contracts do provide portfolio managers with incentives to gather information. We find that the risk-averse manager's effort is an increasing function of her share in the portfolio's return. This result affects the risk-averse investor's choice of contracts. Unlike previous results, the purely risk-sharing contract is now shown to be suboptimal. Using numerical methods we show that under the optimal linear contract, the manager's share in the portfolio return is higher than what it is under a purely risk sharing contract. Additionally, this deviation is shown to be: (i) increasing in the manager's risk aversion and (ii) larger for tighter short-selling restrictions. As the constraint is relaxed the deviation converges to zero.

​We present a model of participation in large elections with an endogenous formation of voter groups. Partisan citizens decide whether to become leaders (activists) and try to persuade impressionable citizens to vote for the leaders' preferred party. In the (unique) pure strategy equilibrium, the number of leaders favoring each party is a function of the cost of activism and the importance of the election. In turn, the expected turnout and the winning margin in an election are a function of the number of leaders and the strength of social interactions. The model predicts a non-monotonic relationship between the expected turnout and the winning margin in large elections.

​This paper describes a test of the null hypothesis that the first K autocorrelations of a covariance stationary time series are zero in the presence of statistical dependence. The test is based on the Box- Pierce Q statistic with bootstrap-based P-values. The bootstrap is implemented using a double blocks-of-blocks procedure with prewhitening. The finite sample performance of the bootstrap Q test is investigated by simulation. In our experiments, the performance is satisfactory for samples of n = 500. At this sample size, the differences between the empirical and nominal rejection probabilities are essentially eliminated.

​This article analyzes the fractional Dickey-Fuller (FDF) test for unit roots recently introduced by Dolado, Gonzalo and Mayoral (2002) within a more general setup. These authors motivate their test with a particular analogy with the Dickey-Fuller test, whereas we interpret the FDF test as a class of tests indexed by an auxiliary parameter, which can be chosen to maximize the power of the test. Within this framework we investigate optimality aspects of the FDF test and show that the version of the test proposed by these authors is not optimal. For the white noise case we derive simple optimal FDF tests based on consistent estimators of the true degree of integration. For the serial correlation case, optimal augmented FDF (AFDF) tests are difficult to implement since they depend on the short term component. Hence, we propose a feasible procedure that automatically optimizes a prewhitened version of the AFDF test and avoids this problem.

​We analyze an election in which voters are uncertain about which of two alternatives is better for them. Voters can acquire some costly information about the alternatives. In agreement with Downs's rational ignorance hypothesis, as the number of voters increases, individual investment in political information declines to zero. However, if the marginal cost of information acquisition approaches zero as the information acquired becomes nearly irrelevant, there is a sequence of equilibria such that the election outcome is likely to correspond to the interests of the majority. Under certain conditions, the election outcome corresponds to the interests of the majority with probability approaching one. Thus, "rationally ignorant" voters are consistent with a well-informed electorate.

​This paper examines the relationship between wealth accumulation and job search dynamics. It proposes a model in which risk-averse individuals search for jobs, save into a risk-free asset, and borrow to smooth their consumption. In the model, one motivation for accumulating wealth is to finance voluntary quits in order to search for a better job. Using data on men from the National Longitudinal Survey (1979 cohort), I estimate by maximum likelihood the individual's dynamic decision problem and use the resulting optimal policies to simulate joint employment and saving histories. The results show that borrowing constraints are tight and reinforce the influence of wealth on job acceptance decisions, namely that more initial wealth and access to larger amounts of credit increase wages and unemployment duration.